Chartis: Better late than never: start gathering data now for IFRS 9 and CECL

Financial Institutions’ (FIs’) compliance with accounting standards is a cornerstone of investor confidence, and a fact of life for FIs: trouble awaits any that fail to report their numbers. But the world of financial risk is continually moving, a constant cycle of changes and updates. FIs will again have to review how they evaluate and report credit risk recognition, having created, bought and adapted technology systems to handle it under Basel III.

Under the incoming Current Expected Credit Loss (CECL) standard and International Financial Reporting Standard (IFRS) 9, FIs will have to estimate the entire expected lifetime losses of their loans, leases and debt securities across their portfolios, for up to 12 months in many cases. This will affect their reporting behavior and capital requirements, and may even restructure the credit offerings they offer.

With few exceptions, FIs will have to comply with at least one of these standards in their jurisdictions. Hardest hit will be multinationals that operate in distinct countries that have adopted both IFRS 9 and CECL (notably US institutions with lines of business across EMEA or APAC), which will have to create systems that can handle these distinct standards. Because CECL and IFRS 9 have several similarities, many FIs may believe they can simply adapt the system they have for one to deal with the other. But rather than being different versions of the same thing, these standards are additive, and FIs should aim for a combined system for both. This is costly, however, and in any case FIs must have enough of the right technology already in place.

The one key to unlocking all the standards – from CECL to IFRS 9 to the standards under Basel III – is data. FIs will require data from areas of trading that were not properly recorded before, and this will mean a big change in their internal processes, storage and strategies. To get an accurate idea of their credit risk, FIs will require much more data than they did under previous standards: gathering, collating and analyzing full data sets will be essential if they want to comply. They must be able to source the external data necessary for these calculations and ensure they have a process to capture the origination data, as well as appropriate systems to analyze how these interact with the wider market climate.

Unless they start to address the data issue immediately, however, many FIs will be left without the historical data they need. Ideally, they should have started gathering and processing data about five years ago, but most didn’t. So it’s vital they start doing it now. They also should aim to ‘buy’ rather than ‘rent’ their data systems: rather than continually importing historical data from outside, they should create an effective data capture and processing system in-house. The cost and effort may be higher, but this is the best way FIs can comply now, and – more importantly – keep up with the ever-changing vagaries of financial risk.

For more information on both IFRS 9 and CECL, see the Chartis Research reports IFRS 9 Technology Solutions: Market Update 2017, and Spotlight on the CECL Reporting Standard, available via www.chartis-research.com